Mindtree. Source: Company Data; PL Research.

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1 Strong Quarter, Guidance remains conservative April 18, 2018 Madhu Babu Rating Accumulate Price Rs866 Target Price Rs930 Implied Upside 7.4% Sensex 34,332 Nifty 10,526 (Prices as on April 18, 2018) Trading data Market Cap. (Rs bn) Shares o/s (m) M Avg. Daily value (Rs m) Major shareholders Promoters 13.37% Foreign 41.69% Domestic Inst. 8.71% Public & Other 36.23% Stock Performance (%) 1M 6M 12M Absolute Relative How we differ from Consensus EPS (Rs) PL Cons. % Diff Price Performance (RIC: MINT.BO, BB: MTCL IN) (Rs) 1, Apr 17 Jun 17 Source: Bloomberg Aug 17 Oct 17 Dec 17 Feb 18 Apr 18 Mindtree results beat our estimates in USD revenues, EBIDTA margin and PAT. PAT was 33% above our estimates led by margin beat and higher other income (aided by reversal in earn out payment and forex gains). Revenues at USD226.2mn were up 5.4% QoQ and up 15.6% YoY above our estimates (PLe: USD222mn). EBIDTA margin for the quarter came at 16.1% up 100bps QoQ and above our estimates (Ple : 15%). Within verticals, momentum was strong across portfolio baring BFSI. Mindtree guided for momentum in revenue growth to continue in FY19E aided by strong deal pipeline and improved deal closures. However, Mindtree s guided that FY19E USD revenue growth would be better than FY18 which is ambiguous considering the strong exit revenue runrate and positive growth commentary (Mindtree delivered only 8.6% USD revenue growth in FY18E). Mindtree preponed wage hikes to 1QFY19E (compared to staggered wage hikes given over 2Q and 3Q every year). We read the preponing of wage hikes as positive which could also indicate robust revenue growth outlook for the company. However, company cited that wage hikes would be 300bps headwind for 1QFY19E margins. We believe that strong revenue growth could partially offset the headwinds from wage hikes in 1Q. Mindree needs to deliver strong execution over 2Q 4Q to gradually recoup the margins. Mindtree guided that FY19E EBIDTA margins would be better than FY18 (which is 13.6% EBIDTA margin for FY18). Despite strong exit EBIDTA margin (16.1%), full year FY19E margin guidance looks conservative. Led by strong exit revenue runrate, we raise our USD revenue growth estimates and now expect Mindtree to grow by 17% USD revenue growth for FY19E (vs 12.7% modeled earlier). We revise Mindtree EBIDTA margin estimates to 15.5/16.5% for FY19/FY20E (vs 15.3/16% earlier). We also increase our effective tax rate assumption to 27% (vs 25% earlier).we upgrade our EPS estimates for FY19/FY20E by 7/10% to Rs39/48.5/sh. Mindtree trades at 17.8x FY20E EPS (TCS trading at 20x FY20E EPS). Mindtree is likely to grow 2x the pace of TCS in FY19E which could help stock command robust P/E multiples. We note that Mindtree traded at par and even premium (vs TCS) on valuation front during FY15 FY16. Led by revenue growth upgrade, we further rerate the stock and value Mindtree at 19x FY20E (vs 15.5x FY20E EPS modelled earlier). This yields a TP of Rs930/sh which is a 35% upgrade in TP. Retain Accumulate. Key financials (Y/e March) E 2020E Revenues (Rs m) 52,364 54,628 64,480 73,357 Growth (%) EBITDA (Rs m) 7,181 7,405 10,014 12,115 PAT (Rs m) 4,186 5,747 6,400 7,958 EPS (Rs) Growth (%) (30.7) Net DPS (Rs) Profitability & Valuation E 2020E EBITDA margin (%) RoE (%) RoCE (%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%) Source: Company Data; PL Research. Q4FY18 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 Exhibit 1: Q4FY18: Consolidated P&L (Rs mn) Q4FY18 Q3FY18 QoQ gr. Q4FY17 YoY gr. PLe Var (Act. Vs Est.) Sales ($ mn) % % % Sales 14,640 13, % 13, % 14, % EBITDA 2,355 2, % 1, % 2, % EBITDA Margin 16.1% 15.1% 103 bps 14.2% 191 bps 15.0% 109 bps PAT 1,822 1, % % 1, % EPS (diluted) (Rs) % % % Revenues beat estimates: Revenues at USD226.2mn were up 5.45% QoQ and 15.6% YoY and above our estimates (PLe: USD222 mn). PAT was 33% above our estimates led by margin beat and higher other income. We note that forex gains (Rs188mn) and reversal of an earnout payout (Rs174mn) boosted other income for the quarter. Revenues from top 10 clients grew by 5.5% QoQ and accounted to 43.7% of total revenues. Top client (Microsoft) revenues were up 13% QoQ and accounted to 17.8% of total revenues. Revenues from Top 2 10 accounts were up 0.8% QoQ led by leakage in select banking clients. Volume growth for the quarter stood at 7.8% QoQ(Onsite volumes up 7.3% QoQ and offshore volumes up 7.9% QoQ). Blend pricing dropped by 1.9% (Onsite pricing up 0.1% QoQ and offshore pricing down 4.1% QoQ). Technology Media Entertainment vertical revenues were up 8% QoQ led by growth in Microsoft account. Retail &CPG vertical revenues were up 8.6% QoQ which Travel vertical revenues were up 9.6% QoQ remained solid. Within verticals, BFSI vertical was down 4% QoQ and remained weak. Hence, excluding BFSI, momentum was strong across verticals. Digital accounted to 45% of total revenues and grew by 8.1% QoQ and 31.4% YoY. Exhibit 2: Mindtree Organic USD Revenue growth QoQ (%) Exhibit 3: Mindtree Reported USD Revenue growth QoQ (%) Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 April 18,

3 Margins show good improvement: EBITDA Margin for the quarter came at 16.1% up 100bps QoQ and above our estimates (Ple: 15%). Improvement in revenue growth and stabilization in effort mix in favour of offshore appear to have aided margins. For the full year FY18, Mindtree has delivered an EBIDTA margin of 13.6% down 10bps YoY. However, EBIDTA margin stood at 16.1% which leads to a solid exit EBIDTA margin for Mindtree. Mindtree management has guided for YoY improvement in EBIDTA margin in FY19E which appears conservative considering the strong exit EBIDTA margin. We build FY19E EBIDTA margin at 15.5% which represents a 190bps YoY improvement. Mindtree has preponed wage hikes to 1QFY19 and company would also have additional visa expenses in 1Q every year (Though a lower quantum this year). However, strong revenue growth could partially negate the margin headwinds for 1Q. Mindtree would need to execute steadily to recoup EBIDTA margins over 2Q 4QFY19 to deliver a steady full year margin print. Exhibit 4: EBITDA Margins vs Average Rupee dollar rate Exhibit 5: Onsite Effort Mix for Mindtree (%) EBIDTA Margin(%) Average Rate (RHS) Q2FY15 Q3FY15 Q4FY % 24.0% 22.0% 20.0% 18.0% 16.0% 14.0% 2QFY14 3QFY14 4QFY14 Exhibit 6: Net employee addition vs. Utilisation rates (%) Net Employee addition Utilisation rate (RHS) 1,500 1, (500) (1,000) 1, (81) (120) (513) 76.00% 75.00% 74.00% 73.00% 72.00% 71.00% 70.00% 69.00% 68.00% 67.00% April 18,

4 Exhibit 7: Total Employees vs. Net additions Total MindTree Minds Net Addition (RHS) 19,000 18,000 17,000 16,000 15,000 14,000 13,000 12,000 12,845 13,018 13,323 14,202 14,427 15,582 16,243 16,623 16,110 16,219 16,099 16,470 16,561 16,910 17,200 17,723 1,500 1, (500) (1,000) Strong TCV for the quarter: Total TCV signing also was strong at USD298 Mn for (vs USD 209Mn in 4QYF17). Digital deal TCV stood at USD102mn for ( vs USD50mn for ). Exhibit 8: TCV Wins (USD mn) USD mn TCV signing Exhibit 9: TCV Signed USD mn Order signing New Wins Renewals Expiring within 1 year Expiring > 1 year Digital April 18,

5 Key Business Metrics: Billing Rates: Onsite realisation was up by 0.1% QoQ, while offshore realisation was declined by 4.3% QoQ, Blend pricing dropped by 1.9% QoQ Exhibit 10: Billing Rates Growth/Decline QoQ Onsite Offshore 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2.0% 4.0% 6.0% 0.5% 1.5% 2.4% 3.9% 3.0% 1.4% 0.6% 4.0% 4.5% 0.5% 0.1% 0.2% 5.4% 3.4% 1.4% 4.3% Total Volume growth stood at 7.8% QoQ. Onsite Volumes were up 7.3% QoQ while offshore volumes up 7.9% QoQ. Exhibit 11: Volume Growth/Decline QoQ 20.0% Onsite Ofshore Total 15.0% 10.0% 5.0% 0.0% 5.0% 10.0% 6.0% 6.4% 4.1% 1.9% 1.5% 1.8% 7.8% 4.7% 2.4% 2.2% 3.7% 1.8% 1.8% 3.0% 1.9% April 18,

6 Exhibit 12: Revenue Mix of Mindtree by delivery Onsite Offshore 65.0% 60.0% 55.0% 50.0% 45.0% 40.0% 35.0% 2QFY14 3QFY14 4QFY % 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% Exhibit 13: Geography Mix (%) % of Total Revenues US Europe India APAC Exhibit 14: Geography wise revenues and growth USD mn QoQ gr. YoY gr. US % % Europe % % India % % APAC % % Total Revenues % % Exhibit 15: Vertical Mix (%) % of Total Revenues Technology, Media and Services BFSI Retail, CPG & Manufacturing Travel & Hospitality April 18,

7 Exhibit 1: Vertical wise revenues and growth USD mn QoQ gr. YoY gr. Technology, Media and Services % % BFSI % % Retail, CPG & Manufacturing % % Travel & Hospitality % % Total Revenues (USD mn) % % TME Vertical revenues were up 8.3% QoQ led by growth in Microsoft account. Retail CPG vertical revenues were up 8.6% QoQ and Travel vertical revenues were up 9.6% QoQ remained strong. Within verticals, BFSI (down 4% QoQ) was weak. Hence ex BFSI, momentum was strong across verticals. Exhibit 2: Service Mix (%) % of revenues Development Maintenance Consulting & IP Licensing Package Implementation Independent Testing Infrastructure Management & Tech Support Exhibit 3: Revenues by project type As a % of revenues Fixed price project Time & Material Exhibit 4: Revenues by effort mix and delivery centres Effort Mix (%) Onsite Offshore Delivery Mix (%) Onsite Offshore April 18,

8 Exhibit 5: Headcount Metrics Total Headcount Total MindTree Minds ,723 Software Professionals 15,092 15,189 15,068 15,413 15,441 15,782 16,068 16,595 Sales and Support 1,018 1,030 1,031 1,057 1,120 1,128 1,132 1,128 Gross Addition ,102 Net Addition (513) 109 (120) Attrition (LTM)* Utilization (%) Including Trainees Excluding Trainees April 18,

9 Exhibit 6: Consolidated Financial summary of Mindtree FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E Revenues in USD mn Growth % (YoY) 8.3% 15.1% 16.4% 22.5% 9.0% 8.6% 16.9% 14.0% Average Exchange rate (USD vs INR) Revenues in Rs mn 23,618 30,316 35,619 46,894 52,364 54,628 64,480 73,357 Growth (YoY) 23% 28% 17% 32% 12% 4% 18% 14% EBIDTA 4,864 6,100 7,092 8,297 7,181 7,405 10,014 12,115 EBIT 4,240 5,291 6,074 6,965 5,323 5,690 8,337 10,282 APAT 3,393 4,507 5,364 6,033 4,186 5,747 6,400 7,958 EBIDTA Margin 20.6% 20.1% 19.9% 17.7% 13.7% 13.6% 15.5% 16.5% EBIT Margin (%) 18.0% 17.5% 17.1% 14.9% 10.2% 10.4% 12.9% 14.0% PAT Margin (%) 14.4% 14.9% 15.1% 12.9% 8.0% 10.5% 9.9% 10.8% Adjusted EPS EPS Growth (%) 55% 31% 19% 12% 31% 41% 30% 24% P/E ROE (%) 29.9% 30.5% 29.4% 27.4% 16.8% 21.9% 22.6% 24.2% Dividend payout ratio 14.5% 23.1% 26.5% 29.2% 40.0% 29.5% 29.5% 29.5% Dividend Yield (%) 0.5% 1.0% 1.4% 1.7% 1.6% 1.2% 1.3% 1.7% Consolidated Balance sheet (Rs mn) Net Cash On Balance sheet 5,190 6,188 8,749 3,343 7,386 8,407 10,925 15,310 Net cash per share Net Cash per share/ As a % of stock price 5% 6% 8% 3% 7% 6% 8% 11% Consolidated Cash flow (Rs mn) CFO from Operations Capex Acquisition FCF (3,761) FCF/EBIDTA 33% 28% 48% 45% 72% 53% 48% 54% * Higher Other income which is led by reversal of eqrnout provision for acquisitions (Rs 916mn) and lower tax (Rs160mn) has led to higher reported PAT growth in FY18. April 18,

10 Income Statement (Rs m) Y/e March E 2020E Net Revenue 52,364 54,628 64,480 73,357 Employee Expenses 34,125 35,641 42,215 48,037 Gross Profit 18,239 18,987 22,265 25,320 Other costs SG&A expense 11,058 11,582 12,251 13,204 EBITDA 7,181 7,405 10,014 12,115 Depr. & Amortization 1,858 1,715 1,676 1,834 Other Income 226 1, Profit before Tax 5,549 7,469 8,767 10,902 Total Tax 1,363 1,722 2,367 2,943 Profit after Tax 4,186 5,747 6,400 7,958 Ex Od items / Min. Int. Adj. PAT 4,186 5,747 6,400 7,958 Avg. Shares O/S (m) EPS (Rs.) Balance Sheet Abstract (Rs m) Y/e March E 2020E Shareholder's Funds 25,775 26,745 30,879 36,016 Total Debt Other Liabilities Total Liabilities 28,781 29,850 34,084 39,325 Net Fixed Assets 5,942 5,327 4,751 4,017 Goodwill 4,470 4,470 4,470 4,470 Investments Net Current Assets 15,752 17,286 21,946 27,771 Cash & Equivalents 8,435 9,456 12,510 16,895 Other Current Assets 11,199 11,941 13,778 15,448 Current Liabilities 3,882 4,112 4,342 4,572 Other Assets 2,617 2,767 2,917 3,067 Total Assets 28,781 29,850 34,084 39,325 Cash Flow Abstract (Rs m) Y/e March E 2020E C/F from Operations 6,545 5,032 5,902 7,594 C/F from Investing (4,533) 679 (670) (480) C/F from Financing (993) (4,634) (2,166) (2,716) Inc. / Dec. in Cash 1,019 1,076 3,066 4,398 Quarterly Financials (Rs m) Y/e March Q1FY18 Q1FY18 Q3FY18 Q4FY18 Net Revenue 12,895 13,316 13,777 14,640 EBITDA 1,435 1,541 2,074 2,355 % of revenue Depr. & Amortization Net Interest (654) (573) (59) (533) Other Income Profit before Tax 1,590 1,660 1,714 2,505 Total Tax Profit after Tax 1,217 1,247 1,461 1,822 Adj. PAT 1,217 1,247 1,461 1,822. Key Financial Metrics Y/e March E 2020E Growth Revenue (%) EBITDA (%) (13.5) PAT (%) (30.6) EPS (%) (30.7) Profitability EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%) Balance Sheet Net Debt : Equity (0.3) (0.3) (0.4) (0.4) Net Wrkng Cap. (days) Valuation PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x) Earnings Quality Eff. Tax Rate Other Inc / PBT April 18,

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